During the course of a project, you may find yourself in a position where the work needs altering in some way, requiring a contract variation.  You and your client might enter into a further agreement (usually in writing) to modify the contract, allowing the contractual variation.  On occasion, you and your client might agree orally to vary the contract.

Sometimes, your agreement may contain a ‘no oral modification’ (NOM) clause, meaning that you are prevented from effecting a contract variation unless it is in writing.  Australia has to date deemed NOM clauses ineffective in circumstances where the parties have entered into a subsequent oral or implied agreement varying a contract.[1]  However, we expect that the UK decision of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 may provide reason for the Australian courts to reconsider its position.

 

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24

The UK Supreme Court decision of Rock Advertising Limited v MWB Business Exchange Centres Limited considered whether a contract can be varied informally by parties where a ‘no oral modification’ (NOM) clause provided that a contract cannot be varied orally.

On 12 August 2011, MWB Business Exchange Centres (MWB) entered into a licensing agreement with Rock Advertising Ltd (Rock) to occupy space in London for 12 months.  Included in the agreement was the following NOM clause:

“This Licence sets out all of the terms as agreed between MWB and Licensee.  No other representations or terms shall apply or form part of this Licence.  All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” 

On 27 February 2012, Rock had accumulated arrears of licence fees.  Rock proposed a revised payment schedule which deferred part of the February and March payments over the remainder of the licence term.  Rock’s company director alleged that he had agreed to vary the licence agreement over the telephone with an employee of MWB.

MWB denied that there had been any agreement and on 30 March 2012, MWB locked Rock out of the premises due to the failure to pat the arrears and terminated the licence with the effective date being 4 May 2012.  MWB sued for the arrears and Rock counterclaimed damages for wrongful exclusion from the premises.  The issue before the courts was whether the variation agreement was legally effective.

 

Central London County Court

The Central London County Court found in favour of MWB because although the oral agreement had been made and it was supported by consideration, it was ineffective as it was not recorded in writing.

 

The Central London Court of Appeal

The Central London Court of Appeal held that the variation was effective as consideration was provided and the oral agreement amounted to an agreement to dispense with the NOM clause.

 

The UK Supreme Court

MWB appealed to the UK Supreme Court.  The majority of the UK Supreme Court found that the NOM clause was effective, thereby preventing any oral variation for the following reasons.

• Parties are free to agree to bind their future conduct, including the form of variations.
• NOM clauses are often included in contracts for commercial reasons. These reasons included, amongst others, that NOM clauses prevent informal attempts to undermine written agreement and they provide certainty about the intention of a variation.
• The enforcement of the ‘NOM’ clauses will not prevent a party who has relied on an oral agreement to its detriment from relying on the doctrine of estoppel in the appropriate circumstances.
• The law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.

Lessons learned

Although Australian courts have generally found that oral modifications can override a NOM clause in a contract, this case casts doubt on whether this will continue in future.

For abundant caution, we think it is important for consultants to:

• make a note of any NOM clause when reviewing contracts; and
• follow the procedure set out in any NOM clause to record the modifications in writing with any required signatures so that you can be confident they will be enforceable.

 

Kathryn Budd

Risk Manager – NSW

[1] Liebe v Molloy (1906) 4 CLR 347 353-355; Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439, 447; GEC Marconi Systems & BHP (2003) 128 FCR 1, 62-63